Short-Term America Revisited? Boom and Bust in the Venture Capital Industry and the Impact on Innovation

Abstract

This chapter seeks to understand the implications of the recent decline in venture activity for innovation. It argues that the situation may not be as grim as it initially appears. While there are many reasons for believing that on average venture capital has a powerful effect on innovation, the effect is far from uniform. During boom periods, the prevalence of over funding of particular sectors can lead to a sharp decline in the effectiveness of venture funds. While prolonged downturns may eventually lead to good companies going unfounded, many of the dire predictions today seem overstated.

Ayash and Rastad (2017) express several concerns about our 2014 analysis of private equity buyouts. We welcome their interest in our work but think their criticisms are off the mark. Some of their claims reflect a misunderstanding of the Census Bureau’s Longitudinal Business Database (LBD) and its underlying data inputs. Because the LBD has emerged as a major laboratory for empirical studies in economics and finance, we use this opportunity to reiterate and clarify some of its important features. In a similar spirit, we elaborate on steps taken to develop our large sample of private equity buyouts. We also address Ayash and Rastad’s remarks about the empirical design of our establishment-level analysis, our methods for distinguishing between leveraged buyouts (LBOs) and other private equity transactions, bankruptcy rates among firms acquired in LBOs, their assertion that we undercount large public-to-private LBOs, and other matters.

Gompers, Paul. "The Entrepreneurial Manager, Module 2 Part 2: Resourcing the Business Model – Team and Culture." Harvard Business School Module Note 817-110, March 2017. (Revised January 2018.)
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